Archer-Daniels-Midland Company: 2020 Third-Quarter Form 10-Q Summary
Business context and reporting period
ADM is a global agricultural origination, merchandising, transportation, processing, and human and animal nutrition company operating in more than 190 countries. The filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Reportable segments are Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition, with remaining activities classified as Other Business.
COVID-19 affected food-service demand, ethanol demand, supply chains, and certain nutrition markets. ADM temporarily idled two dry-mill ethanol facilities in April 2020 and reduced some ethanol production, while demand for industrial alcohol used in hand sanitizer remained strong.
Financial performance and key metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Revenue | $15.126 billion | $16.726 billion | Down 9.6% |
| Gross profit | $1.042 billion | $1.078 billion | Down 3.3% |
| Gross margin | 6.9% | 6.4% | Improved |
| Earnings before income taxes | $200 million | $503 million | Down $303 million |
| Net earnings attributable to controlling interests | $225 million | $407 million | Down 45% |
| Diluted EPS | $0.40 | $0.72 | Down $0.32 |
| Adjusted diluted EPS | $0.89 | $0.77 | Up $0.12 |
| Adjusted EBITDA | $913 million | $886 million | Up $27 million |
| Dividends per share | $0.36 | $0.35 | Up $0.01 |
Reported earnings were materially reduced by $396 million of early debt retirement charges and a $15 million mark-to-market loss on the conversion option of the Wilmar-linked exchangeable bonds. Adjusted segment operating profit increased to $849 million from $764 million.
| Segment operating profit | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Ag Services and Oilseeds | $436 million | $417 million | Up $19 million |
| Carbohydrate Solutions | $246 million | $182 million | Up $64 million |
| Nutrition | $147 million | $118 million | Up $29 million |
| Other Business | $20 million | $47 million | Down $27 million |
| Total segment operating profit | $904 million | $758 million | Up $146 million |
For the nine months, revenue was $46.377 billion versus $48.327 billion, gross profit was $3.101 billion versus $2.978 billion, and net earnings attributable to controlling interests were $1.085 billion versus $875 million. Diluted EPS was $1.93 versus $1.55, while adjusted diluted EPS was $2.38 versus $1.83. Nine-month adjusted EBITDA increased to $2.529 billion from $2.355 billion.
Cash flow, balance sheet, debt, and liquidity
- Cash used in operating activities was $1.516 billion for the nine months, improving from $3.639 billion used in the prior-year period. Working-capital requirements, including deferred consideration on securitized receivables, remained a significant cash use.
- Cash provided by investing activities was $4.728 billion, including $6.724 billion of proceeds related to retained interests in securitized receivables and $708 million from asset and business sales.
- Cash used in financing activities was $1.943 billion, including $2.032 billion of long-term debt repayments, $607 million of dividends, and $117 million of share repurchases.
- Cash and cash equivalents were $948 million at September 30, 2020, compared with $852 million at December 31, 2019. Including restricted cash, total cash, cash equivalents, and restricted cash was $4.259 billion.
- Total assets were $44.795 billion and shareholders’ equity was $19.341 billion at September 30, 2020.
- Short-term debt was $209 million, current maturities of long-term debt were $2 million, and long-term debt was $7.922 billion. Long-term debt represented 29% of total capital; net debt to capital was 27%, versus 29% at year-end 2019.
- Lines of credit totaled $10.7 billion, of which $9.1 billion was unused. No commercial paper was outstanding against the $5.0 billion commercial-paper-supported facilities. Accounts receivable securitization programs provided up to $1.8 billion, of which $1.4 billion was utilized.
- The current ratio was 1.6 to 1. ADM expects approximately $0.8 billion of 2020 capital expenditures, $0.8 billion of dividends, and $0.1 billion of share repurchases.
Material changes versus the prior comparable periods
- Revenue declined primarily because of lower volumes of rice, ethanol, oils, soybeans, and wheat. Ag Services and Oilseeds revenue fell 9%, and Carbohydrate Solutions revenue fell 20%; Nutrition revenue was broadly stable in the quarter.
- Segment profitability improved despite lower revenue. Stronger results in Refined Products and Other, Starches and Sweeteners, Human Nutrition, Animal Nutrition, and Wilmar more than offset weaker Crushing, Ag Services, and Other Business results.
- Processed volumes declined 11% in the quarter, primarily because corn processing decreased by 1.535 million metric tons following the dry-mill ethanol idling. Oilseed volumes declined modestly.
- SG&A increased $58 million to $636 million, principally due to higher performance-related compensation accruals.
- ADM changed certain agricultural commodity inventories from LIFO to market value effective January 1, 2020. The change reduced cost of products sold by $91 million, or $69 million after tax, in the first quarter; it did not affect cash flow.
- ADM issued $1.5 billion of notes in March 2020 and $300 million of zero-coupon exchangeable bonds linked to Wilmar shares in August 2020. It redeemed or repurchased approximately $1.2 billion of notes and debentures in September 2020.
- ADM sold part of its Wilmar holdings, reducing ownership from 24.8% at December 31, 2019 to 22.1% at September 30, 2020, and recognized related gains.
- The effective tax rate was a 13.0% benefit in Q3 2020 versus an 18.9% expense in Q3 2019, and was a 3.4% expense for the first nine months versus 19.4% in the prior-year period. The change reflected transaction-related items, geographic earnings mix, and U.S. tax credits.
Guidance, outlook, commentary, risks, and unusual items
ADM did not provide a formal consolidated earnings forecast in the filing. Management expects the temporarily idled ethanol facilities to restart as demand improves within the next 12 months. The company expects capital expenditures, dividends, and share repurchases for 2020 of approximately $0.8 billion, $0.8 billion, and $0.1 billion, respectively.
Management reported strong North American grain and oilseed export demand, increased Chinese buying, tighter South American soybean supplies, improved biodiesel margins, solid starch and sweetener margins, and continued growth in flavors, pet food, plant-based proteins, and probiotics. COVID-19 continued to weigh on food-service volumes, ethanol demand, aquaculture feed, and some amino-acid markets.
- Commodity prices, crop conditions, weather, trade policy, global demand, foreign exchange, and freight markets can materially affect margins and fair values.
- COVID-19 could disrupt employees, suppliers, customers, logistics, facilities, and demand, particularly for biofuels and food-service-related ingredients. ADM stated that the ultimate impact cannot yet be predicted and could be material.
- Commodity and derivative positions include significant Level 3 measurements. At September 30, 2020, Level 3 assets were $2.672 billion and Level 3 liabilities were $835 million.
- Purchase obligations totaled $19.5 billion, including $18.1 billion expected to be paid within the following 12 months.
- ADM disclosed putative class actions alleging ethanol benchmark manipulation and peanut-price fixing. The company denies liability and believes these matters will not have a material adverse effect, but outcomes remain uncertain.
- Tax disputes included assessments in Argentina and the Netherlands. ADM has accrued its best estimate for the Netherlands matter and has not recorded a liability for the Argentine assessments based on its assessment of the merits.
- On October 1, 2020, after the reporting date, ADM restructured its U.S. accounts receivable securitization program from a deferred-purchase-price structure to a pledge structure.
Important facts for investors to verify
- Whether improved adjusted operating performance can continue after excluding debt-retirement charges, Wilmar-related gains, tax benefits, and other specified items.
- The timing and economics of restarting the idled ethanol facilities and the sustainability of ethanol, biodiesel, starch, and sweetener margins.
- Cash conversion, working-capital needs, and reliance on receivables securitization and other short-term funding sources.
- The effect of commodity prices, derivatives, foreign exchange, and Level 3 valuations on reported earnings and equity.
- The ultimate costs and timing of disclosed litigation and tax contingencies.
- Whether planned 2020 capital expenditures, dividends, and share repurchases remain consistent with cash generation and leverage targets.